SmartInvestment\'s last dividend was $1.75. It\'s dividend growth rate is expect

Question

SmartInvestment's last dividend was $1.75. It's dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. It's required return (Rs) is 12%. What is the best estimate of the current stock price? (Please show work)
A) $41.58 B) $42.64 C) $43.71 D) $44.80 E) $45.92

SmartInvestment's last dividend was $1.75. It's dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. It's required return (Rs) is 12%. What is the best estimate of the current stock price? (Please show work)
A) $41.58 B) $42.64 C) $43.71 D) $44.80 E) $45.92


A) $41.58 B) $42.64 C) $43.71 D) $44.80 E) $45.92

Explanation / Answer

Dividend in year 1= 1.75*(1+25%)^1=2.1875

Dividend for Year 2= 1.75*(1+25%)^2=2.734

Terminal value=2.734*1.06/(12%-6%)=48.307

PV of dividend= (2.1875/1.12^1)+(2.734/1.12^2)+(48.307/1.12^2)

=$42.64

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